Book contents
- Frontmatter
- Contents
- Preface and acknowledgments
- Introduction
- Part I Market microstructure and the intermediation theory of the firm
- 1 Market microstructure and intermediation
- 2 Price setting and intermediation by firms
- Part II Competition and market equilibrium
- Part III Intermediation versus decentralized trade
- Part IV Intermediation under asymmetric information
- Part V Intermediation and transaction-cost theory
- Part VI Intermediation and agency theory
- Conclusion
- References
- Index
1 - Market microstructure and intermediation
Published online by Cambridge University Press: 18 December 2009
- Frontmatter
- Contents
- Preface and acknowledgments
- Introduction
- Part I Market microstructure and the intermediation theory of the firm
- 1 Market microstructure and intermediation
- 2 Price setting and intermediation by firms
- Part II Competition and market equilibrium
- Part III Intermediation versus decentralized trade
- Part IV Intermediation under asymmetric information
- Part V Intermediation and transaction-cost theory
- Part VI Intermediation and agency theory
- Conclusion
- References
- Index
Summary
Firms create and manage markets by acting as intermediaries between buyers and sellers. An intermediary is an economic agent who purchases from suppliers for resale to buyers or who helps buyers and sellers meet and transact. Intermediaries seek out suppliers, find and encourage buyers, select buy and sell prices, define the terms of transactions, manage the payments and record keeping for transactions, and hold inventories to provide liquidity or availability of goods and services.
This book is concerned with the economic role of firms and the functioning of markets in general. In finance, the study of intermediation and the institutions of exchange is called market microstructure. I apply the term market microstructure generically to refer to the operation of markets for all types of goods and services. I show that there are basic similarities between a broad range of intermediation models in economics and finance. Throughout the book, the main results are derived within a common framework, with similar notation and related economic reasoning.
Just as producing goods and services consumes resources, so does the establishment and operation of markets to allocate those goods and services. Companies incur costs in adjusting prices and communicating price information to buyers and sellers. The types of information imperfections that are present determine the intermediation activities of firms. When there is demand and supply randomness, intermediaries provide liquidity or immediacy by standing ready to buy and sell. Given uncertainty about the willingness to pay or opportunity costs of trading partners, intermediaries coordinate transactions by matchmaking and brokering activities.
- Type
- Chapter
- Information
- Market MicrostructureIntermediaries and the Theory of the Firm, pp. 3 - 26Publisher: Cambridge University PressPrint publication year: 1999